Carbon Border Adjustment Mechanism (CBAM): Purpose, Implementation, and Impacts on Developing Countries

Carbon Border Adjustment Mechanism (CBAM) is a policy tool that aims to address the problem of carbon leakage in the context of international trade. It is a measure that seeks to ensure that imports from countries with less stringent climate policies do not have an unfair advantage over domestic producers who face higher costs associated with climate mitigation measures.

Under CBAM, a carbon price would be applied to imported goods based on the carbon content of their production, similar to the way a carbon price is applied domestically. This would create a level playing field for domestic producers who are subject to domestic carbon pricing and would also incentivize trading partners to implement their own carbon pricing mechanisms.

The proposal for a Carbon Border Adjustment Mechanism (CBAM) was first introduced by the European Union (EU) in its European Green Deal policy package in December 2019. The EU officially proposed the introduction of CBAM in July 2021, as part of a package of climate and energy policies aimed at achieving the EU’s goal of reducing greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels.

The proposal is currently being discussed and negotiated by the European Parliament and the Council of the European Union and is expected to be implemented by 2026, subject to approval by the European Parliament and the Council.

The European Union (EU) is currently developing its own CBAM, which is set to be implemented in 2026. The EU CBAM would initially cover imports of cement, iron and steel, aluminum, fertilizers, and electricity. The implementation of CBAM has been a controversial issue, with some arguing that it could lead to trade tensions and potential retaliation from countries whose exports are subject to the mechanism.

Working of Carbon Border Adjustment Mechanism

A Carbon Border Adjustment Mechanism (CBAM) works by placing a carbon price on imported goods based on their carbon content. The idea behind CBAM is to ensure that imported goods do not have an unfair advantage over domestic products that are subject to domestic carbon pricing and to encourage trading partners to implement their own carbon pricing mechanisms.

The implementation of CBAM would involve several steps. First, the carbon content of imported goods would need to be assessed. This would involve calculating the emissions associated with the production of the goods, taking into account factors such as the energy used in production, transportation, and any other emissions associated with the manufacturing process.

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Once the carbon content of the imported goods has been assessed, a carbon price would be applied. This would be based on the price of carbon in the country where the goods are produced or an estimate of what the price would be if a carbon pricing mechanism was in place.

The revenue generated by the CBAM could be used in a variety of ways, such as to support domestic industries that are facing higher costs associated with climate mitigation measures or to fund investments in clean energy and other climate-friendly technologies.

CBAM has the potential to create trade tensions and may be subject to legal challenges under World Trade Organization rules, so it is important for countries to work together to ensure that any implementation is fair, transparent, and consistent with international trade rules.

Goal of CBAM

The goal of the Carbon Border Adjustment Mechanism (CBAM) is to address the problem of carbon leakage in the context of international trade. Carbon leakage occurs when production moves from countries with more stringent climate policies to countries with less stringent policies, resulting in a net increase in global greenhouse gas emissions.

The purpose of CBAM is to ensure that imported goods are subject to the same carbon pricing mechanisms as domestically produced goods, to avoid creating an unfair advantage for imported goods, and to incentivize other countries to implement their own carbon pricing mechanisms.

By implementing CBAM, countries aim to create a level playing field for domestic producers who are subject to domestic carbon pricing and to encourage their trading partners to implement their own carbon pricing mechanisms. This can help to ensure that the costs associated with climate mitigation are shared fairly and that emissions are reduced globally.

The implementation of CBAM is also seen as a way to strengthen the effectiveness of domestic climate policies by reducing the risk of carbon leakage and ensuring that domestic industries are not put at a disadvantage relative to their competitors in countries with weaker climate policies.

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Overall, the goal of CBAM is to support the transition to a low-carbon economy by creating a fair and effective system for pricing carbon emissions in the context of international trade.

Impact of CBAM on developing countries

The impact of the Carbon Border Adjustment Mechanism (CBAM) on developing countries is a complex issue that depends on several factors, including the nature of their trade relationships with countries that are implementing CBAM, the sectors in which they are exporting to CBAM countries, and their own climate policies and carbon pricing mechanisms.

On the one hand, CBAM has the potential to create a significant economic burden for developing countries that are heavily dependent on exports to countries that implement CBAM. This is because CBAM could increase the cost of its exports and reduce its competitiveness in the CBAM market. Additionally, the cost of implementing the necessary monitoring and reporting systems to comply with CBAM regulations could be a significant financial burden for some developing countries.

On the other hand, CBAM could also provide an opportunity for developing countries to adopt their own carbon pricing mechanisms and transition to a low-carbon economy. By encouraging their trading partners to implement carbon pricing mechanisms, CBAM can create a global market for low-carbon products, which could provide opportunities for developing countries to export low-carbon goods and services.

To mitigate the potential negative impacts of CBAM on developing countries, some proposals have suggested the use of revenue generated by CBAM to support capacity building and technology transfer in developing countries. Additionally, some have proposed the establishment of a global carbon pricing system to create a more level playing field for all countries.

Overall, the impact of CBAM on developing countries is complex and requires careful consideration of the potential economic and environmental impacts, as well as the need to ensure a fair and equitable transition to a low-carbon economy for all countries.

What is the difference between ETS and CBAM?

The main difference between ETS (Emissions Trading System) and CBAM (Carbon Border Adjustment Mechanism) is their scope and purpose.

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ETS is a policy tool that sets a cap on the total amount of greenhouse gas emissions that can be emitted by covered entities, such as power plants or industrial facilities, in a given period. These entities are then allocated a certain number of emissions allowances, which they can trade with other entities. The idea behind ETS is to create a market-based incentive for entities to reduce their emissions, by giving them a financial incentive to sell any surplus allowances they have.

On the other hand, CBAM is a policy tool that seeks to address the issue of carbon leakage in the context of international trade. Carbon leakage occurs when production moves from countries with more stringent climate policies to countries with less stringent policies, resulting in a net increase in global emissions. CBAM aims to ensure that imported goods are subject to the same carbon pricing mechanisms as domestically produced goods, to avoid creating an unfair advantage for imported goods and to incentivize other countries to implement their own carbon pricing mechanisms.

Another difference between ETS and CBAM is their level of complexity. ETS is a complex system that requires the allocation and trading of allowances, as well as monitoring and reporting of emissions. CBAM, on the other hand, is a simpler mechanism that involves assessing the carbon content of imported goods and applying a carbon price to them.

In summary, while ETS and CBAM are both policy tools designed to reduce greenhouse gas emissions, they have different scopes and purposes. ETS aims to reduce emissions from covered entities by creating a market-based incentive for them to reduce their emissions, while CBAM aims to ensure that imported goods are subject to the same carbon pricing mechanisms as domestically produced goods to avoid creating an unfair advantage for imported goods.

Anup Kumar Dey

I am Anup Kumar Dey, a Piping Engineer with more than 19 years of experience.

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